Economic recovery: What will the ‘new normal’ look like?
About 6 weeks ago we passed the anniversary of the announcement of the first lockdown across the UK. Something which, at the time, was expected by many to be a short term ‘circuit breaker’ before normal economic service was resumed. It didn’t pan out like that.
The talk now is not about getting back to normal but just what, exactly, the ‘new normal’ will look like.
On the one hand it holds out the promise of more flexible working arrangements for those whose roles are not location dependent and each new forecast of UK GDP growth for next 12 months or so seems to show an improvement on the preceding one. The most recent forecast I have seen as at the date of this blog was the EY Item Club suggesting it might hit 6.8% in 2021.
But if those are the credits, if you will, in relation to the current position of the UK economy there are also some concerning debits we also need to bear in mind. Let’s look at that GDP growth. C. 7% per annum growth is unprecedented in recent UK history – but it is only so strong because the extent to which the economy contracted in 2020 as a result of the Coronavirus impact was so great.
It is estimated that the UK economy shrank by c. 9.8% in 2020 (the worst contraction across the G7). So even if we do enjoy c. 7% growth in 2021 the UK economy still has a way to go to get back to its pre pandemic levels. I know what you are thinking, there are a lot of strong compelling arguments that we have allowed GDP statistics to enjoy a greater importance in the national consciousness than they deserve I wouldn’t disagree; but that is a separate discussion for another day. GDP measures are important if only for the impact they have on levels of confidence in the economy and our view, as consumers and investors, of its direction of travel.
Then there is the High Street ; or more specifically those businesses which have seen their customers behaviour shift to online spending. The UK had, prior to the pandemic, one of the highest levels of online consumer spending in the world. Has the last 14 months or so seen a permanent further shift in this direction? Time will perhaps tell; but time has already run out for certain long established High Street brands – Debenhams and TopShop to name but two. If what we have been through over the last 14 months will be seen to have given rise to a permanent ‘pivot’ across aspects of UK society and its associated economic behaviours it is likely that this will be like the curate’s egg as the saying goes – good in parts.
But let’s not be too much like Cassandra of ancient Greece. As with any change in the nature or development of a political-economy (Adam Smith used this term as opposed to ‘the economy’ and if it is good enough for him then it is good enough…) it is usually much easier to spot what will be become lost, jettisoned, abandoned or irrelevant as a result of the changes than what will emerge, germinate and bear fruit.
I was particularly struck by this over the weekend when, in my local town with an increasing sense of gloom I counted the ‘To Let’ signs on empty boarded up units on the main shopping street. But then, on the way back to the parked car, went down a cobbled side street which was full of smaller independent shops, cafes, bars and restaurants and it felt like a different world. It was a place of colour, activity, energy and economic activity.
And in many ways that is a good analogy for the wider economy: yes when it changes some businesses fall away but then others can spring up to sometimes (but not always) begin to fill the voids.
The challenge, I think, will be how best to nurture this creative urge or ‘will to life’ (to paraphrase Nietzsche a little) in the economy and provide the support that these new businesses need in order to survive and put down a root system to enable them to thrive.
The economic policy response to the sudden shocks of the pandemic in the shape of soft loans (CBILS and BounceBack) and employee support (Furlough schemes) has been enormously helpful for businesses and, even more importantly, employees and thus the wider economy. These were emergency responses to a unique set of circumstances and so we know that they will not continue forever. But, helpfully, it appears that the Treasury realises that rapidly snatching back these crutches would do more harm than good.
Yes the UK national debt has increased to what would have been regarded as undreamed of (or un-nightmared of for some) levels over the last 14 months; but let’s remember three things: 1) we have a FIAT currency system which means that, up to a point, there is a magic money tree and Government can and has ‘simply printed money’ with no adverse impact thus far; 2) related to this is that the bond markets have not been demanding ever higher interest on Government debt so confidence in the UK’s economic prospects is still present and 3) in the aftermath of the 2008-11 financial crash there was a very interesting research paper put out by the IMF regarding the then unheard of levels of national debt in most developed and developing economies. The paper’s focus was upon what were the most appropriate policy stances for governments to take to most effectively reduce their national debts. And its conclusion was clear – for advanced economies the best policy to adopt to reduce the national debt was….to ignore it. Advanced economies should instead focus upon encouraging useful and value creating economic activity across the public and the private realm and inflation plus tax income would, steadily, deal with any excess levels of national debt.
Or, to put it another way, it seems like the IMF conclusion concurred with the advice which, at the time, was emblazoned across mugs, t-shirts and tea towels across the UK – Keep Calm and Carry On.
Perhaps that is again(?) the most helpful way of thinking about the UK political economy as it gets back to its ‘new normal’ in 2021.
Author: Stephen Gregson, Corporate Finance Director, MHA Moore and Smalley